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09/09/2014

Book Review: China Goes West


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China-Goes-West

The financial world lives to gain from new trends, to get out front, grab an edge, and bring in the profits before the trend matures and a lot of competition moves in. With this focus, Joel Backaler's new book is especially welcome in its description of, and insights on, the ramping up of Chinese overseas investments. China Goes West: Everything You Need to Know About Chinese Companies Going Global has detailed, sophisticated analysis of the Chinese companies that are expanding outward, and of what this can involve. It is a realistic picture rather than just a trend forecast.

Chinese outward investment has shifted from "the natural resource projects in the early 2000s, to include investments in a diverse range of industries and geographies, especially in the West." The total amount of this outflow is estimated at $70 billion in 2012, and forecast to increase substantially from there. But there are some factors and characteristics unique to China that will have major impacts. Chinese companies operate in an environment that is "much different from Western multinationals."

One of the biggest differences is the role of government. In China, government plays a role that ranges from business owner to sponsor, financier to regulator. When Chinese companies look for the money to invest abroad, they end up dealing with a "byzantine web of government agencies involved in overseas investment by Chinese companies going global." At a minimum this can result in delays. It is one of the reasons cited for the fact that "Chinese companies may pay significantly more when acquiring companies in advanced economies."

Chinese companies that want to invest globally are often looking for technology, management talent, brand names to use. However, Backaler concludes, "The vast majority of Chinese firms are not nearly ready to compete internationally." Their "current ability to build global brands is bleak." Reasons include often lack of business discipline. Their business leaders "tend to jump quickly," and make business decisions based on "Guanxi" - relationships with those they know and trust, rather than on systematic business strategy. These companies often "do not understand how to incorporate feedback from their customers," have a "culture of compliance, not striking first.". A common saying is "the bird leading the flock if the first to be shot."

Some of these company failings may be in the process of being corrected. China's domestic market is facing rising costs, and more competition. In response, the companies are moving up the value chain, and looking to global markets. In addition, Backaler notes a generational change. More Chinese are traveling and becoming interconnected with the world outside China, through the Internet, on their mobile devices. There is a continuing inflow of ambitious people with top Western degrees, including MBAs. This indicates an increasing Chinese management knowledge of, and sophistication in, foreign expansion. China Goes West is a unique opportunity to become informed on what will be a major financial trend, and market.

–Bill Hayes

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